Tamilnadu Urban Development Fund (TNUDF)

A Presentation

Scheme of Presentation

Introduction• Purpose of the fund• Objectives• Eligible borrowers / sectors• Lending policies and procedures• Project Prototypes

Introduction

A Trust established under the Indian Trusts Act, 1882, by GoTN, ICICI, HDFC and IL&FS with a line of credit from the World Bank

Purpose of the Fund

TNUDF is a trust fund engaged in the development of urban infrastructure in the state of Tamilnadu. This trust was created as part of a restructuring exercise of an existing World Bank credit to the Government of Tamilnadu (GoTN) in September 1996.

Under the World Bank credit of Rs.167 crores, the Municipal Urban Development Fund (MUDF) was set up in 1988 to fund urban infrastructure needs. The fund has been in existence for 8 years and had extended loans of about Rs.200 crores to 74 Urban Local Bodies (ULBs) upto September 30, 1996.

Purpose of the Fund

Successful track record enabled GoTN to broaden the scope of the fund so as to attract private capital into urban infrastructure, and facilitate better performing ULBs to access capital markets.

In 1996, GoTN, with the assistance of World Bank, invited three financial institutions namely, ICICI, HDFC and IL&FS to convert MUDF into a full fledged trust, namely TNUDF with a private fund manager to deploy the resources of the trust.

Accordingly, TNUDF was established as a trust under the Indian Trusts Act 1882, and is managed by an Asset Management Company, Tamilnadu Urban Infrastructure Financial Services Limited (TNUIFSL)

Fund Objectives

Fund urban infrastructure projects which improve the living standards of the urban population;

Facilitate private sector participation in infrastructure through joint venture and public-private partnerships;

Operate a complementary window, the GRANT FUND, to assist in addressing the problems of the urban poor.

Grant Fund I In order to address the problems of the urban poor Government of Tamil Nadu

has issued guidelines vide G.O. Ms. No.61 of 16/3/2001. The G.O enables a local body to avail Grant Fund to the extent of 30% of the project cost . For the purpose the projects are divided in to

a) Bus stand, commercial complex

b) water supply, sewerage, storm water drains,

roads, street lights and solid waste management

In case of (a) the criteria for availing the Grant is

(i) ratio of own sources : assigned revenue - 3:1

(ii) 80% of property tax collections for the past three years

(iii) No default of annuities in the past 2 years.

In case of (b) the Grant Fund can be availed if beneficiaries of the project are 30% and above below poverty line.

Grant Fund II Tamil Nadu Urban Development Fund also acts as Grant Fund

Managers of the Non-lending Component of TNUDP II project with a line of credit from World Bank.

This Grant can be availed by the local bodies for preparation of Engineering Plan, Hiring of consultants, Design, Management and supervision of projects.

There is no specific criteria for availing this Grant Fund except for adopting World Bank procurement procedures in hiring of consultants for preparation of DPR.

Eligible borrowers / sectors

Urban Local Bodies (ULBs), statutory boards, public sector undertakings and private corporates are the eligible borrowers of the Fund.

The eligible sectors include water supply, sanitation, solid waste management, roads / bridges, transportation, sites and services and integrated area development

Lending policies & procedures

Eligible items for TNUDF funding• Only for capital expenditure

– Civil works– Services – Goods / Materials

• TNUDF will not fund– Land acquisition costs– O&M expenditure / other revenue expenditure such as salaries etc.

Eligibility Criteria

For ULBs etc.• TE / TR < 1• Annuity / Total revenue < 30%

In case where ULBs fail to meet above criteria, the project specific returns (IRR) should be greater than 18.5% p.a.

For private sector borrowers• Long term debt < 1.5 • Net worth• Net fixed assets > 1.5• Long term debt• Average DSCR > 1.5

Tenor and Terms

Rate of Interest 8.50 % 8.75 %Tenor 15 years 20 yearsPrincipal Moratorium 3 years 5 yearsRepayment Period 12 years 15 yearsSecurity Escrow Arrangement

Security Measures

Special recovery mechanism such as escrow accounts of property tax, water charges etc. and hypothecation of movables are being put in place.

In case of commercial complexes,default option of conversion of upto 40% of loans outstanding into office space is being stipulated.

Commercial and Non-commercial

Three fold categorisation indicates on the demand side certain types of urban infrastructure such as toll bridges, markets and bye-passes can be supported by reliance on project cash flows to service debt.

• Projects such as stand alone commercial complexes and office space which rarely recover debt service from rentals are not worth investing in and do not constitute infrastructure in any real sense.

• Second, environmental infrastructure namely water supply, sanitation and solid waste need a mixture of debt and grant financing and should attempt to recover appropriate user charges.

• Third, other municipal infrastructure such as internal roads, parks, crematoriums etc would have to rely solely on general revenues to service debt.

TNUDF EXPERIENCEProject Proto types

TNUDF EXPERIENCE

Commercial

KARUR BRIDGE• Based on these principles, TNUDF has facilitated the first BOT / Toll

bridge, contracted by an ULB in India at an estimated cost of Rs.16 crores.

• The users of the bridge are freight traffic with the capacity to pay. As the bridge would substantially reduce vehicle operation costs (VOC) and time, cash flows to the operator is expected to be predictable.

• The enabling provisions of Tamilnadu State Toll Act has been amended allowing ULBs to enter into BOT style operation, thus offering the investor a stable regulatory framework.

MADURAI BYE PASS

• Madurai the second largest city in Tamilnadu, is a Corporation with an area of 51.82 sq.kms and a population of 9.4 lacs (1991 census). It is a major commercial and religious centre in the Southern region, linking important trade and tourist flows within Tamilnadu.

• The scheme is the construction of a 2 lane Inner Ring Road (IRR) of 27.2 kms between Kanyakumari Road and Melur Road; for which land acquisition has been completed. The IRR would also include construction of 2 Railway Over Bridges (ROB), one each at Ramnad road and Tirunelveli road, and a high level bridge across the Vaigai River.

TNUDF EXPERIENCE

Commercial

MADURAI BYE PASS

Madurai replaced its traditional borrowings in the form of long term loan by its own debt paper. Madurai is the first municipal corporation in Tamil Nadu, which has issued debentures for its project refinancing viz., the Inner Ring Road. The servicing of the bonds would be met out of the toll collections arising out of the traffic on the road. This issue resulted in a flat cost saving of about 2.50 to 3.00 percentage points to the corporation.

TNUDF EXPERIENCE

Commercial

TNUDF EXPERIENCE

Commercial - Madurai Bye pass

TNUDF EXPERIENCELoan Grant Blending - Storm Water Drain in Valasaravakkam

SOLID WASTE MANAGEMENT CONTRACTS• Conversion of Municipal Solid Waste into

Organic Manure (50 tpd plant)• Supply of pay contract between ULB and Private

Sector operator at Rs.3.50 pt + lease rentals• Pressure / Incentive for the ULB to keep the

streets clean.

TNUDF EXPERIENCE

Commercial

TNUDF EXPERIENCE

Public - Private Partnerships

ALANDUR MODEL• 15,000 Households out of 17,000 have

contributed Rs.5000/- per household representing one third of Project Cost of Rs.34 crores.

• Initial tariff in Alandur fixed at Rs.150 per house per month.

• Private Participation in that the private sector has invested equity in the STP.

TNUDF EXPERIENCE

Public - Private Partnerships

ALANDUR MODEL

ALANDUR MODEL

TNUDF EXPERIENCE Public - Private Partnerships

Vision

TNUDF would position itself as a strategic intermediary linking capital markets with Urban Infrastructure needs.

Positive performance during the plan period, achievement of lending targets, high repayment rates and quality infrastructure would demonstrate a track record enabling market access for the Fund.

Capacity building activities, financially disciplined ULBs and strong project pipeline are enabling factors. Preparation includes rating of TNUDF risk assessment of ULBs, setting up a credit enhances, revenue intercepts etc.

Vision

TNUDF would position itself as a strategic intermediary linking capital markets with Urban Infrastructure needs.

Positive performance during the plan period, achievement of lending targets, high repayment rates and quality infrastructure would demonstrate a track record enabling market access for the Fund.

Capacity building activities, financially disciplined ULBs and strong project pipeline are enabling factors. Preparation includes rating of TNUDF risk assessment of ULBs, setting up a credit enhances, revenue intercepts etc.

Resources

1) As a part of its vision raising exercise, TNUDF raised Rs.110.05 crores from the capital market during September - November 2000, by way of issue of unsecured non convertible debentures of Rs.1,00,000/- each. This is the first non-guaranteed, unsecured bond issue by a financial intermediary in India, with urban municipal cash flow as its base.

2) The terms of the issue are as follows:

Size of the issue Rs.110.05 croresTenor 5 yearsCoupon 11.85% p.a.Interest payment Half yearly on May 7th and November 7th

Redemption In Five equal annual instalmentCredit Rating LAA+(SO) by ICRA Ltd.,

Way Forward Water Sanitation Fund

• Urban Infrastructure, especially water and sanitation investments require long term debt on account of externalities over time and space, severe fiscal constraints on the supply of equity from State and local Governments for new investments and substantial low income population constraining the ability to pay for high financing costs.

• Consequently, the need to link city infrastructure financing requirements with domestic capital markets is well understood.

• Debt finance is a pre-requisite for undertaking essential civic investments, and in the long run, domestic savings through capital markets would have to be, predominant source of supply.

• The need for an institutionalised mechanism to raise low cost funds for water and sanitation is clear cut with the US Bond Bank as a potential model.

Way forward Water Sanitation FundThe terms of the issue are as follows:

Mode : Private Placement IssueIssuer : Water and Sanitation Pooled Fund (WSPF) a trust, the deed

of which is registered under the Indian Trust Act This willpool certain Water and Sanitation projects of 14 participatingUrban Local Bodies (ULBs) and the issue proceeds would beutilized to refinance/finance these projects. Tamil NaduUrban Infrastructure Financial Services Ltd., (TNUIFSL)would act as the Trust Manager

Issue Size : Rs. 30.41 CroresCoupon : 9.20% p.a.Tenor : 15 years (With a put and call option at the end of 10th years)Redemption : In 15 equal annual instalmentsPayment of Interest : Annual payment of coupon on a diminishing balance

method.Security : Unsecured Issue

Way forward Water Sanitation FundThe terms of the issue are as follows:

Credit Enhancements : a) The first level of credit enhancement is the escrow of theproperty tax and other collections of the ULBs. This will becovered under a tripartite agreement among WSPF, ULB andULB’s banker.b) The second level of credit enhancement is covered by aDebt Service Reserve Fund in the name of Bond serviceReserve Fund (BSF) which will be set up by the Governmentof Tamil Nadu with a liquid investments of Rs.6.90 crores.This is regardless of ULB’s cash flows.c) The next level is the guarantee issued by USAID to theextent of 50% of the principal. The balance is covered by anundertaking by GoTN in the form of a Government orderthat the shortfall would be replenished by the GoTN to theBSF by deducting their respective share of State FinanceCommission (SFC) devolution accruing to the ULBs.d) WSPF represented by TNUIFSL would monitor theescrow account of the ULBs, coordinate with GoTN in caseof a shortfall and ensure the repayment amount payable tothe investors, in the bank account of the WSPF, before 30days from the due date of bond annuity.

Credit Rating : L AA (SO) by ICRA , Ind AA (SO) by FitchMethod of Servicing byULBs to WSPF

: 1/9th of the annuity due would be placed by the respectiveULBs in a Fixed Deposit every month for a period of 9months. At the beginning of 10th month the amounts soplaced in Fixed Deposits would be transferred to the accountof WSPF. In case there is a short fall in the amounts to beserviced, the same would be met out of SFC devolution/BSF.

LIST OF POOLED PROJECTS Rs. In lakhs

S.No. ParticularsProjectCost

Loan amtsanctioned

Loandisbursed

Water Supply Schemes:1 Ambattur Municipality 336.56 67.32 67.322 Tambaram Municipality 182.00 109.20 109.203 Madhavaram Municipality 325.00 195.00 105.754 Rajapalayam Municipality 85.00 51.00 51.00

Adjacent Urban Areas - AUA 5 (I) Alandur Municipality 427.00 403.00 403.006 (ii) Pammal Municipality 378.00 357.00 357.007 (iii) Ankapathur Town Panchayat 188.00 178.00 178.008 (iv) Ullagaram Town Panchayat 298.00 281.00 281.009 (v) Porur Town Panchayat 579.00 547.00 547.00

10 (vi) Maduravoyal Town Panchayat 146.00 138.00 138.0011 (vii) Valsaravakkam Town Panchayat 189.00 179.00 179.0012 (viii) Meenambakkam Town Panchayat 17.00 16.00 16.00

Under Ground Drainage:13 Madurai Corporation 1407.00 500.00 325.00

4557.56 3021.52 2757.27

Way forward Water Sanitation Fund

WAY FORWARDLinking Markets & Cities with Intended Use Plans

• Creation of a revolving fund by GoI - States

• Tax concessions for municipal bonds by GoI

• Structure a statutory framework to manage the fund

• Borrowing eligibility criteria to be established

• Project implementation procedures including rational & quick procurement

• Framework for tariff setting - through a democratic process

• Fixation of rational levels of upfront contribution by the community / local body

• Capacity building for the raters/Merchant Bankers

TNUDF - Institutional Positioning

PAPER ONERESERVE FUND MODEL

STRUCTURESimplified Flow of Funds

For Reserve Model Pooled Financing

SovereignGovt.

TransferPayments

SovereignGovt.Grant

ReserveFund

RevenueIntercept

Pooled FinancingAuthority

Local Govt.Project

Investors

Trustee

BondsLong term

Principal & InterestPayments

If necessary

If necessary

Local Govt.Project

Local Govt.Project

Local Govt.Project

Local Govt.Project

FundsMarket Rate